I’m embarking on a month-long investigation into the economics of cloud computing and what makes the most financial sense for CIOs of certain companies in certain industries. I’ll be speaking with a wide variety of experts in the field from CIOs to analysts to consultants with the purpose of figuring out what works and what doesn’t. Along the way, I’ll be giving TotalCIO readers periodic updates on what I’m hearing.

For David Linthicum, senior vice president of Cloud Technology Partners (CTP), a Boston software and services provider specializing in cloud migration services, Cloud Economics 101 starts with a homework assignment.

“It really gets down to the planning and understanding of your own requirements. That’s kind of the boring answer I don’t think people want to hear,” Linthicum said.

Boring or not, CIOs, together with their business colleagues, need to identify what CTP has dubbed their “value drivers” for the cloud — that is, where and how the cloud can boost performance based on where the business is and where it needs to go.

Obviously, the value drivers for a big bank, for example, are going to be very different from those of a manufacturing company or a healthcare company and so on, but Linthicum recommends starting the analysis by examining the three areas in every business where there is potential for value to be found in moving to cloud:

operational costs

security and compliance issues

agility

Identifying the operational cost savings of migrating to the cloud — “the whole Capex vs. Opex thing,” as Linthicum put it — is probably the most straightforward analysis for most companies. If a company is about to build another $10 million data center and they’re trying to avoid [the cost of ownership], using cloud computing can add to the bottom line,” he said. Or if a company foresees having a big bolus of data that will need processing and realizes it would take 500 more servers to do it, then outsourcing those operations to cloud could pay off immediately, Linthicum said.

In an area such as security and compliance, however, the ROI of moving to the public cloud will be more difficult to calculate. On first glance, many heavily regulated companies will decide the potential risks of the public cloud will outweigh its benefits. “They just want to maintain the systems and control them more closely than outsourcing them to Amazon or Rackspace or Microsoft [would allow].” But even in these cases, Linthicum recommends CIOs not jump to conclusions. “In the majority of cases, I find out that’s typically not the case,” he said.

For companies that absolutely need to control sensitive data, an alternative is to use a private cloud; however, this option may not be very economical in the end, because you still need to buy your own software and hardware, among other things, Linthicum said. (Much more on the economics of private cloud to come in the next update.)

Still, when it comes to security and moving to the public cloud, “there has to be some planning and some architecture,” Linthicum said, starting with a rigorous assessment of what kinds of data will be stored in the cloud and whether it contains sensitive information.

Probably the most overlooked reason for companies to move to the cloud is agility, Linthicum said. Companies have been so enamored by how the cloud can save them money on operational costs, they neglect to think about the revenue it can generate by helping their businesses move into new markets, acquire companies, and change and shift their core processes around new opportunities. “That typically is where cloud pays off,” said Linthicum.

The move to the multi-cloud

One trend Linthicum has noticed is the increasing move to the multi-cloud, or what he describes as “hybrid cloud on steroids.” Interestingly, the strategy has come to the forefront in part because of all the “shadow cloud IT” commissioned by the business and the need to find a unifying architecture for the sundry cloud services. Cloud management platform vendors such as ServiceMesh, VMware, and IBM sell technology that automates the movement of workloads in between the various cloud services a company may be using.

This cloud strategy is also beneficial for smaller companies and startups because they can leverage multi-cloud as an IT strategy in lieu of building their own data center or renting data center space.

For those CIOs who may be loath to embrace something that has emerged from shadow IT, Linthicum urges CIOs not to rush to judgment.

“When guys like me come in and kind of run the map for them, it does make sense for their marketing department to put their almost-100 TB of video files on a public cloud at $1,000 a month versus making [the marketing department] buy massive amounts of EMC servers, physical servers, for the data center [for] multimillions of dollars,” Linthicum said.

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